Easy Access Medical Supplies makes semi-motorized walking sticks. They have decided to investigate whether they should continue to make or buy the walking sticks from a supplier. Currently, the cost of producing 10,000 semi-motorized walking sticks is as follows: Cost description Per Unit $ Direct Material 15 Direct Labor 10 Variable Factory Overhead 8 Fixed Factory Overhead 15 $48 The same component can be purchased from an outside supplier for $38 per unit. If the company purchases the semi-motorized walking sticks, 20% of the fixed costs will be eliminated. Required: Using incremental analysis, determine if the component should be purchased from the outside supplier? Would your decision in part a) change if the company has the opportunity to rent out its facilities that it currently uses to manufacture the component for $5,500 ? Show full computations. Why “Opportunity Costs” are not recorded in the financial books but are considered a relevant cost.
Easy Access Medical Supplies makes semi-motorized walking sticks. They have decided to investigate whether they should continue to make or buy the walking sticks from a supplier. Currently, the cost of producing 10,000 semi-motorized walking sticks is as follows: Cost description Per Unit $ Direct Material 15 Direct Labor 10 Variable Factory Overhead 8 Fixed Factory Overhead 15 $48 The same component can be purchased from an outside supplier for $38 per unit. If the company purchases the semi-motorized walking sticks, 20% of the fixed costs will be eliminated. Required: Using incremental analysis, determine if the component should be purchased from the outside supplier? Would your decision in part a) change if the company has the opportunity to rent out its facilities that it currently uses to manufacture the component for $5,500 ? Show full computations. Why “Opportunity Costs” are not recorded in the financial books but are considered a relevant cost.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Easy Access Medical Supplies makes semi-motorized walking sticks. They have decided to investigate whether they should continue to make or buy the walking sticks from a supplier.
Currently, the cost of producing 10,000 semi-motorized walking sticks is as follows:
Cost description |
Per Unit $ |
Direct Material |
15 |
Direct Labor |
10 |
Variable Factory |
8 |
Fixed Factory Overhead |
15 |
|
$48 |
The same component can be purchased from an outside supplier for $38 per unit.
If the company purchases the semi-motorized walking sticks, 20% of the fixed costs will be eliminated.
Required:
- Using incremental analysis, determine if the component should be purchased from the outside supplier?
- Would your decision in part a) change if the company has the opportunity to rent out its facilities that it currently uses to manufacture the component for $5,500 ? Show full computations.
- Why “Opportunity Costs” are not recorded in the financial books but are considered a relevant cost.
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